Tesla Q3: Revenue flat as AI spending crushes operating income

Tesla reported third-quarter results after the market closed on Tuesday, revealing that while automotive margins improved, heavy spending on artificial intelligence and robotics caused operating income to collapse. The electric vehicle maker generated $28.05 billion in revenue, a figure that remained flat compared to the same period last year and matched Wall Street expectations. Non-GAAP earnings came in at $0.48 per share, a slight beat over the $0.45 consensus, yet still down 4 percent from the prior year.

The bottom line took a significant hit from increased operational costs. Operating income fell 56 percent year-over-year to $718 million, resulting in an operating margin of 2.6 percent. This compares to 5.8 percent a year earlier and a recent low of 1.4 percent in the second quarter. Total gross margin rose to 19.6 percent, up 160 basis points from the prior year, but the surge in expenses overwhelmed this improvement.

Spending on research and development jumped 69 percent to $2.76 billion as the company pours capital into its Super Intelligence program, the Optimus robot, and the Cybercab. Total operating expenses rose 39 percent year-over-year to $4.78 billion. Stock-based compensation also climbed sharply to $1.17 billion, driven partly by the 2025 CEO pay package, compared to $663 million in the prior year period.

Capital investment accelerated dramatically, with capex reaching $4.73 billion, more than double the $2.25 billion spent a year ago. Despite this heavy outlay, free cash flow remained positive at $1.53 billion. Tesla ended the quarter with $45.4 billion in cash and investments. GAAP net income declined 43 percent to $787 million, a figure that included a $288 million unrealized gain on bitcoin holdings and a $142 million unrealized loss on its SpaceX stake.

On the revenue side, the services and other segment emerged as a bright spot, with income growing 33 percent to $4.61 billion. Gross profit in this area hit a record $734 million, driven by charging, insurance, and parts sales. Conversely, energy generation and storage revenue dropped 16 percent to $2.88 billion, a decline attributed to tariff-related customer refunds, even though storage deployments increased 10 percent to 13.7 gigawatt hours.

Automotive gross margin excluding regulatory credits recovered to 18.1 percent, up from 16.3 percent in the second quarter. The company cited better product mix and increased FSD subscription revenue as factors, though average selling prices continued to decline. Regulatory credit income fell 73 percent to $113 million as the federal fuel-economy penalty market dried up. Management noted that battery availability remained the primary constraint on vehicle volumes, despite ending the quarter with the largest passenger vehicle backlog in four years.

Looking ahead, the company has spent $13.01 billion on capital projects through the first nine months of 2026. This pace suggests a challenging path to meeting the annual guidance of more than $25 billion, potentially requiring a massive spending surge in the final quarter. Management will discuss these results on a conference call scheduled for 5:30 p.m. ET.